Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter 2013 Omnicell Earnings Conference Call. [Operator Instructions] It's now my pleasure to turn the conference call over to Mr. Rob Seim, CFO of Omnicell. Sir, you may begin.

Thank you. Good afternoon, and welcome to the Omnicell 2013 First Quarter Results Conference Call. Joining me today is Randall Lipps, Omnicell Chairman, President and CEO. You can find our results in the Omnicell first quarter earnings press release posted in the Investor Relations section of our website at www.omnicell.com. This call will include forward-looking statements subject to risks and uncertainties and other factors that could cause actual results to differ materially from those expressed or implied. For a more detailed description of the risks that impact these forward-looking statements, please refer to the information under the heading, forward-looking Statements, in our press release today and under the headings, Risk Factors and Management's Discussions and Analysis of Financial Conditions and Results of Operations, in the Omnicell annual report on Form 10-K filed with the SEC on March 11, 2013, as well as more recent reports filed with the SEC. Please be aware that you should not place undue reliance on any forward-looking statements made today. The date of this conference call is May 2, 2013, and all forward-looking statements made on this call are based on the beliefs of Omnicell as of this date only. Future events or simply the passage of time may cause these beliefs to change. Finally, this conference call is a property of Omnicell Incorporated and any taping, other duplication or rebroadcast without the expressed written consent of Omnicell is prohibited. Today, Randy will first cover an update on our business, then I'll cover our results for Q1 and our guidance for 2013. Following that, we'll take your questions. Randy?

Well, good afternoon. Our momentum for the second half of 2012 has continued through the first quarter of 2013. Our revenue is in line with expectations. Earnings are ahead of our guidance for Q1, and our business grew 36% year-to-year organically and from our acquisition of MTS. Investments in our 3-leg strategy over the past several years continue to drive our success. The first leg of our strategy, which is expansion in the U.S. markets for the delivery of differentiated innovative solutions has generated another set of new customer wins in Q1 across all types of hospital systems and continued automation footprint expansion amongst existing customers. The second leg of our strategy expansion outside the U.S., our systems are just beginning to be adopted. As still a small part of Omnicell, our international business continues to enjoy positive momentum with more initial installs in China and orders now being booked from our 2012 contract win with AP-HP. The final leg of our strategy is to expand through strategic partnerships and acquisition of new technologies. The actions we took in 2012 are allowing us to use our medication management expertise to bring more comprehensive solutions to customers across a broader spectrum of health care. This includes our alliance with Cerner to deliver enhanced interoperability for acute care customers and our acquisition of MTS to deliver advanced automation to Non-Acute Care customers. Through MTS, we are also reaching out -- reaching the home with our multi-med solution that are at the forefront of medication adherence. Every day, over 0.25 million patients are utilizing medication adherence packaging from Omnicell in the U.K. alone, and adoption is starting in other European markets. In Q1, we saw new accounts moving to Omnicell in all areas of our business. In the for-profit hospitals sector, I'm very…

Thanks, Randy. So as Randy did mention, once again, we had a very good quarter for new customer wins, consistent with the last 8 years. 37% of our automated dispensing system orders were from new and competitive conversion customers, with approximately 1/2 coming from competitive conversions and 1/2 from greenfield customers who had never purchased automation before. Our Q1 revenue is in the middle of the guidance range we provided on our last investor call, and our non-GAAP EPS exceeded our guidance by $0.02. Cash grew $8 million during the quarter to $70 million. Operationally, it was a good quarter. Revenues were $87.1 million. As we guided, revenue was down 3% sequentially, but up 36% from Q1 in 2012. The revenue decline sequentially simply reflects installation timing. We had record backlog at the end of 2012, much of it with larger customer institutions. Larger installations, especially with new customers, tend to take longer to complete. Many are now underway. We expect them to flow into the revenue process through the remainder of 2013, which is fully contemplated in our annual forecast. GAAP earnings per share were $0.10, up 43% from Q1 2012, and contain some uncommon one-time charges that largely offset each other. As Randy mentioned, in Q1, we realigned organizationally, resulting in a one-time, pretax restructuring charge of $0.7 million, comprised of severance-related costs. During Q1, we also recognized a $1.8 million pretax impairment software engineering expense that have been previously been capitalized. The impairment recognizes that we will not continue with some specific technologies that were in the later stages of the development cycle. The impairment is reflected in the research and development line of the P&L in the Non-Acute segment. This is an unusual charge. We have not experienced it in Omnicell before, and we really don't…

[Operator Instructions] Your first question comes from the line of Jamie Stockton with Wells Fargo.

I guess, maybe the first one, the restructuring, could you just confirm which line that you stuck that $700,000 in?

Yes. So the restructuring for $700,000 is in the GAAP statements, and we did remove it for the non-GAAP statements. It is primarily in the SG&A line.

Okay. That's great. And then on the Vanguard deal, I think you said that the timing was going to be a few years. Should we literally interpret that as rolling out across, I think, they got, what, 28 hospitals over the course of 3 years?

Yes, that's about right. We found with large organizations, such as Vanguard that we've done in the past, that they typically roll out approximately 10 hospitals a year.

And just to confirm on that deal, it's not a hunting license, it is a -- they're going to go systemwide with Omnicell and the parent organization is essentially driving the deal, correct?

That is correct. They have 28 hospitals. One of them is already an Omnicell hospital. The other ones will all be competitive conversions, and they are standardizing on us.

Okay. And then maybe one last question. The MTS business, could you talk about -- I assume you're not seeing any material orders with the Acute Care business with the MTS product until you officially roll out kind of the newer, I think, lower ASP equipment from MTS that's more targeted Acute Care. Is that still essentially the situation?

Yes. As we've said before, we do have products under development that will make it more attractive for acute care institutions to start adopting that type of product. But we are seeing interest from acute care institutions that want to reduce the chance of readmittance and have out-patient pharmacies and so forth. It's just like always is with those institutions, the sales cycles tends to be in the year to 2 year-long range and so we're used to that [ph].

Your next question comes from the line of Matt Hewitt with Craig-Hallum Capital.

This is actually Dylan [ph], subbing in for Matt. First one, really, what we noticed with product gross margins seemed to regress back to what they were at Q2 of 2012, and there's been quite the range for that number over 2012 and kind of leading into this quarter. How should we think about product gross margins going forward for the rest of the year? What kind of level do you guys target or do you think is optimal to run the business?

Well, we've got a range of products in our portfolio that carries a variety of different gross margins from pure software products to hardware products that we OEM. So the mix of the products tend to affect the gross margin in any one quarter. Overall, we feel like the gross margin that we had last year is the type overall, the average gross margin -- or the type of gross margins that we would expect overall this year.

Okay. And then one of the metrics we like to track is your government orders, and it looks like in Q1, they were pretty strong. Do you guys think that was a function of kind of a pull through from the effects of the sequestration trying to jump ahead of that? Or was there any other dynamic that kind of drove those purchasing decisions?

Well, we don't think it was really driven by anything to do with sequestration or for those type of events. The government, just like other institutions, go through a pretty long and thoughtful purchasing process. And we did have some new VA hospitals that jumped on to Omnicell's platform, and that drove a very strong quarter with the government.

Your next question comes from the line of Charles Rhyee with Cowen and Company.

Rob, can -- I'm sorry if you could go over the tax thing again a little bit, just to make sure I understood that correctly. I missed a little bit of the sort of the things that went into it, and if we normalized for -- can you talk about what -- you had said you would expected some benefit from the R&D tax credit, but when you guys gave guidance, what did you kind of assume for the tax rate in the first quarter relative to clearly what you -- you got more than you expected.

So we were anticipating an overall tax rate for the year of 40%, but we were anticipating the first quarter would be a bit better than that. And the way that this works is you apply an annualized tax rate and then the R&D tax credit for last year comes in as a one-time item. That provides you a better much tax rate in Q1, and we had anticipated that. We actually ended up with $200,000 more R&D tax credit in Q1 than we had anticipated in the guidance. So that, with a little bit of other benefits in tax associated with stock options, we ended up with about $0.01 more earnings from the one-time events in taxes.

Okay. And then the restructuring, how did that affect you? How much did that affect the tax rate or was that separate? I might have confused the 2 together.

So the restructuring only affected taxes and that it lowered the overall earnings of the company. The taxes are, of course, calculated on GAAP earnings.

Oh, I see, okay. That's helpful. Can -- okay. Can I just ask you then also on the international side? Can you talk a little bit about more -- sort of what was the overall growth in international revenue in the quarter? And I think you talked about 2012 ending sort of up 20% year-over-year. If you can give us a sense on how fast this side of the business is and how much of that was maybe from the Qatar deal versus the rest of the international side?

Yes, well, the Qatar deal has shipped. We have fully built the product in our factories and shipped it to Qatar, but it is not installed yet. So it is sitting in our deferred revenue, deferred gross profit on the balance sheet, but it has not yet flown through P&L. We expect that hospital, which is still finishing out construction, to be ready to start implementing in the second half of this year.

Okay. And then most are then -- so obviously, then, the international growth today was -- without it, what was that in the quarter?

I don't have at my fingertips what the international growth was year-to-year, but we do anticipate, this year, international growth in revenue to be about 20%.

Your next question comes from the line of Sean Wieland with Piper Jaffray.

What exactly did you restructure, and why did you restructure it?

Well, there were 2 events that happened, right, restructuring, which was reorganization, which was outside the pro forma. And then within the pro forma, we sunset some Non-Acute Care products that we just thought weren't going to grow fast enough for us and picked some new lines to invest people, time and energy in that we thought long-term or even-medium term had much better growth and speed to market and growth factors that made a whole lot more sense. So it was painful to kind of shut down the line, but moving the resources over to this faster growing opportunity made a whole lot more sense to us. And so these products had not hit the market yet, and so they don't really impact current revenues and earnings projections, but we're really excited about making the change in allocation of resources really to drive the multi-med opportunity even faster.

Were they products that were part of the MTS portfolio?

Yes, they were all product in the MTS portfolio, both small hardware and some software.

Okay, got it. And then just one quick one. How does the Vanguard deal roll into the backlog? How do we think about that factored into your backlog guidance?

Well, as Rob was saying, it's usually we -- it's still early. And usually, you sign a big deal with a big hospital and you -- and you know that you're going to swap out all the hospitals eventually, and so you have to really go back and have that discussion with them. So it's a little bit hard to tell. Usually, there's some pent-up demand there because they probably delayed purchasing any products at any hospitals over the last 6 months before they decided on a single vendor like us. So usually, in the early start of the deal, there's some pent-up demand and they want to move more quickly and -- but I think -- but as we get clearer understanding on how fast they want to move on that, it will be helpful. We haven't had much in the backlog in Q1, but we know it will impact a lot in Q2 and we'll see how the rollout schedule goes, and perhaps, more towards the back end of the year.

Your next question comes from the line of Raymond Myers with Benchmark Company.

Randy, my first question, and Rob also, is how should we view the cadence of R&D expenses throughout the year, considering that $1.8 million was nonrecurring in Q1?

Sure. So if you look at the R&D line, you'll see that Q1 is quite a bit higher than it's ever been in the past, $7.5 million, and that includes the $1.8 million. We typically, on a gross basis, before any capitalization of software are spending in the range of about $7.5 million, and we typically have somewhere in the range of $1 million or so -- $1 million to $1.2 million being capitalized. But I would say that, that does fluctuate quarter-to-quarter, depending upon the actual schedules of our products and when they're in late stage development before we bring them into market. So you will see some ups and downs that, overall, those numbers, $7.5 million gross and about $1 million to $1.2 million in capitalization are the average that you'll see.

So you did about $8 million in the first quarter, $1.8 million was a special charge. That's only $0.5 million -- that's a big difference and you're saying it's only $7.5 million going forward? I don't understand the difference.

Okay. So on a -- in a normal quarter, we would spend $7.5 million on development activity and we would capitalize about $1.2 million of that, and so you'd end up with a net development in the $6.3 million range. And like I said, it does fluctuate quarter-to-quarter. In this quarter, we had that same sort of activity, a little bit more capitalization, but then we wrote off $1.8 million, and so the net effects was we ended up with $7.5 million on the income statement.

Okay. That helps. And then will you be disclosing the revenue split between Acute Care and Non-Acute Care going forward?

Yes, we will.

Can you tell us what it is?

So Acute Care was $66 million and Non-Acute Care was $21 million.

$21 million. Great. And can you tell us what operating cash flow was and capital expense in Q1?

Capital expense was about $2.7 million, and I don't have the operating cash flow right here at my fingerprint. We'll have to get back to you with it.

Okay, that's fine. And then I wanted to touch on the competitive conversions. Did you say 38% of revenue was from new customers and half of that's competitive conversions?

Yes. The metric that we give pertains to our Acute Care business, the medication dispensing systems. And of the orders for those systems, 37% were from new and competitive conversion customers. Half of that was competitive conversion and the other half were new greenfield customers.

So reading into that, it sounds like about 19% of your new business was competitive conversions. That's a -- looks a little bit lower than what we've seen in the past. Should I -- am I reading too much into that?

Yes, you are. It does fluctuate from quarter-to-quarter. Sometimes, most of our new business is from competitive conversions, and sometimes, most of it's from greenfield. But overall, we've had a pretty consistent metric when you average it out over the last 8 years, yet 15% to 20% of our business is from competitive conversions.

Yes, [indiscernible] since the announcement of Vanguard is -- there's a lot of orders to come. That's not in the 38%. We haven't taken very many orders from Vanguard yet. So that one -- that's all to be consumed in the future of the 38% rate as we move forward.

[Operator Instructions] Your next question comes from the line of Gene Mannheimer with B. Riley.

Question on the Vanguard contract. Congratulations on that. Was that built into your guidance that you'd given at the beginning of the year for backlog?

Yes. So the guidance definitely assumed that a number of deals that were in the pipeline would close. We don't know exactly which ones we'll be able to close, but we do assume that there will be a number of new contracts just like Vanguard.

Okay. So -- because I was thinking, given you've already taken some initial orders as early as Q1, that maybe that would be incremental to your backlog guidance for the full year.

Yes. It just sort of depends, as Randy said, on how fast Vanguard wants to roll out.

That's the wildcard, Gene. If Vanguard decided, gee, let's move really quickly, that can accelerate more orders, and therefore, more backlog this year. But as we said, we just -- I mean, we just literally inked the deal a few weeks ago and we're still in discussions on the rollout.

Okay, sounds good. And then with respect to the software engineering impairment, was that related to projects that were in development prior to your acquiring MTS, or since you bought them?

So they were projects that were in development prior to us acquiring MTS, but they didn't really hit the late stage where we would be capitalizing the software until after the acquisition.

Okay, okay. So just to clarify then on -- regarding the adjusting for the one-time charges and credits in the quarter, you'd characterize the business as in line or better for the first quarter?

Yes, in line. Some aspects, a little bit better, but most aspects, in line.

Okay. And then last thing for me. Given one of your competitors is working diligently to roll out a new platform, are you seeing a window right now to take share that's disproportionate to what you're accustomed to seeing there?

Well, I think our products have always been leading technology, and I think that whether our competitor comes out with new stuff or current stuff, it's just getting the word out on Omnicell. And there is momentum in the marketplace that is refreshing to see, and especially seeing these for-profit hospitals looking to buy systems that really not only meet the basic needs, but really going to drive efficiency and more enterprise functionality that allow them to get the benefits of running a very large system.

This concludes the question-and-answer session. I will now turn the conference over to Mr. Randy Lipps for closing remarks.

Well, thanks for joining us today. As you can tell, we are really excited about the momentum we have in the marketplace both on the Acute Care and the Non-Acute Care side, and lots of opportunity there. And I think the fact that we're raising our EPS guidance demonstrates that we're committed to making all our numbers and exceeding them, and so we look forward to a great 2013. See you guys next time.

Thank you, ladies and gentlemen. This concludes today's First Quarter 2013 Omnicell Earnings Conference Call. You may now disconnect.